Economic Report 2016 - Oil & Gas UK

4. Profitability and Corporate Finances Many companies on the UKCS are reliant on cash-flows from existing operations to fund maintenance and new development projects. With profitability at an all-time low given the market downturn, companies have had to borrow more money to fund ongoing commitments. 4.1 Profitability Free cash-flow generated on the UKCS is a function of three key variables: price, production and costs. The impact of the fall in oil and gas prices will be partially offset by the sharp decline in capital investment, the continued operating cost reductions and further increases in production. Although the free cash-flow picture for the UKCS has improved from the £4.2 billion deficit last year, there is still likely to be a £2.7 billion deficit in 2016. When existing operations are generating marginal, if any, returns for investors, the prospect of raising further capital to invest in new projects is extremely difficult, as shown by the lack of new commitments this year (see section 5.3). This has caused a knock-on effect on profitability throughout the supply chain as projects are postponed or cancelled (see section 6 for more on the supply chain).